The UAE has evolved as one of the most popular destinations for the international business community in recent years. Backed by world-class infrastructure, and powerful government initiatives, the United Arab Emirates attracts entrepreneurs and businesses from the world over. The countryโs tax-free status undoubtedly has played a key role in this growing popularity.
The UAE Free Zones, in particular, have served as crucial destinations for global businesses due to their favorable tax environment. These Zones offer innumerable benefits, including tax exemptions, hundred percent foreign ownership, etc.
With the introduction of a new corporate tax structure, however, there are growing doubts about this tax-free status of the country. Questions about whether companies in the UAE Free Zones will continue to enjoy these benefits or not are being raised.
In this blog post, we will present a clearer picture of whether these companies in the UAE Free Zones will continue to enjoy the tax-free status and the implications of the new regulations.
Free Zones in the UAE
The Free Zones in the UAE are designated areas, created to promote commercial and business activities. These Zones, therefore, are marked by specific tax exemptions for businesses. The regulatory processes in these Zones are simple. Foreign ownership is permitted up to one hundred percent ownership.
The UAE Free Zones were established to promote investment and trade at the global level. The environment has been attractively designed so that businesses can operate here with minimal restrictions. The Free Zones have helped foster innovation and economic growth in different sectors like finance, technology, logistics, and manufacturing.
In the United Arab Emirates, there are 40+ Free Zones across multiple disciplines, where expats and investors are allowed to completely own their companies. Historically, the Free Zones in the UAE have enjoyed 100% corporate tax exemptions, profit repatriation, and exemption from customs duty. Added to this, the personal income tax in the UAE has always been zero.
Key Free Zones in the UAE include the Jebel Ali Free Zone (JAFZA), known for logistics, petrochemicals, e-commerce, and trade, and the Dubai Multi Commodities Centre (DMCC), a hub for commodities and financial services.
Recent Changes in Tax Regulations
The new federal Corporate Tax introduced in the UAE has been set at 9%, effective from June 2023. Thus, there has been a marked shift from the conventional tax-free status of the country.
As per the new Tax policy, a 0% Corporate Tax rate is applicable for companies that meet certain conditions. Companies outside the Free Zones or working in non-qualifying fields cannot benefit from tax exemptions.
Current Tax Status of Free Zone Companies
Companies that wish to take advantage of the 0% Corporate tax rate need to meet specific conditions. They have to generate qualifying income and stay compliant with the latest regulations in the UAE so that their tax-exempt status is maintained. These are known as Free Zone companies.
Mainland companies, however, are subject to the 9% Corporate tax rate, applicable to their profits.
Free Zone companies can enjoy tax exemption if they –
- Conduct business inside the designated Free Zone.
- Conduct business internationally
However, there are taxes if these companies are working with Mainland companies.
Implications for Businesses
The new Corporate Tax in the UAE has important implications, especially for Free Zone companies. These businesses need to mandatorily meet the qualifying income criteria in order to take advantage of the 0% tax benefits.
New companies in Free Zones need to ensure compliance, especially related to Mainland operations, to take zero-tax advantages. To optimize your tax benefits, you need to align your businesses with the Free Zone requirements. It is best to consult with professionals for tax advice, business structure, and revenue streams. It will also help them stay compliant as regulations evolve further.
The UAE Free Zones were created to support global businesses and businesses here continue to enjoy tax benefits, even with the new Corporate Tax rate. However, they need to ensure compliance with the regulations and take advantage of the evolving policies.
Looking for professional advice to optimize your tax strategy? Speak with UAE experts at Consultzone and steer your company toward growth with the right tax strategy.
FAQs
Are Free Zone companies in the UAE still completely tax-free?
Since the corporate tax has been introduced in the UAE, the Free Zones are not completely tax-free.
What is the current corporate tax rate for Free Zone companies?
QFZPs are subject to zero percent corporate tax while on taxable income, the applicable tax rate is 9%.
Are there any exemptions available for Free Zone companies?
Yes, there are exemptions available for certain qualifying activities for Free Zone companies.
How do the new tax regulations affect Free Zone companies compared to mainland companies?
Companies in the UAE Free Zone are not required to pay corporate taxes if they do business with companies in Free Zones. However, if they work with a company on the mainland, corporate taxes are applicable.
What should new businesses consider when setting up in a Free Zone?
You first need to identify your business activity, which depends on the nature of the business. It is also vital to consider the Free Zoneโs location, infrastructure, and facilities of the Free Zone.
